BOE's Bailey Raises Prospect of More Aggressive Rate Cuts

Bank of England Governor Andrew Bailey has held out the prospect of the central bank becoming more aggressive in cutting interest rates, provided inflation stayed subdued.

(Bloomberg) — Bank of England Governor Andrew Bailey has held out the prospect of the central bank becoming more aggressive in cutting interest rates, provided inflation stayed subdued. 

In an interview with the Guardian newspaper, Bailey said he was encouraged by the fact that cost-of-living pressures were not as persistent as the BOE feared they might be. 

There was a chance of the bank becoming “a bit more activist” in its approach to cutting rates if the news on inflation continued to be good, Bailey said.

The comments mark a shift from the steady-as-she-goes tone adopted since the BOE cut rates in August for the first time since the pandemic. Bailey himself has called for a “gradual approach” to reversing the bank’s most aggressive tightening in decades.

Inflation has fallen from double digits in the wake of the energy price shock and now stands at just above the 2% target. The BOE is expecting price growth to pick up temporarily this year on the back of higher energy prices.

Services inflation and wage growth, being closely monitored by the BOE for signs of underlying pressures, have also eased, though remain above levels that the BOE is comfortable with. Money markets are all-but pricing in a cut in November and see a further five reductions next year.

Bailey told the Guardian that the BOE is watching developments in the Middle East “extremely closely” amid fears of a fresh oil price shock. Oil prices are up for a third day as traders assess supply risks, with Israel expected to make a retaliatory strike against Iran following Tehran’s missile barrage earlier this week.

The region accounts for about a third of global supply, and traders are concerned the latest escalation could hit flows if energy facilities are attacked or supply routes blocked.

“Obviously, we keep watching it. We watch it extremely closely to see the impact of the latest news. But … my sense from all the conversations I have with counterparts in the region, is that there is, for the moment, a strong commitment to keep the market stable,” Bailey said.

“There’s also recognition there’s a point beyond which that control could break down if things got really bad. You have to continuously watch this thing, because it could go wrong.”

—With assistance from Tom Rees.